The Ultimate ETF Guide: Investing Made Simple for Canadians [2022]

Do you want to beat almost 95% of all active equity investment fund managers over a 20-year time period? 

Do you want to achieve that while spending less than one hour per year on your investments? 

Well then, I have great news for you if you are open to investing in exchange-traded funds (ETFs) that track major market indices.    

This article will help you feel more comfortable with the basics of ETF investing: including the types, costs, benefits and the factors you should consider.  You will even get some tips on how to design your own ETF portfolio.

The Ulitmate ETF Guide: Introduction

ETFs are baskets of assets that are traded on a stock exchange.  ETFs allow an investor to construct a diversified portfolio with as little as one click and at a lower cost compared to the mutual funds provided by banks and money management firms.

If you are a passive investor with a busy life and zero interest in the stock market, then an ETF that tracks a market index is a good investing solution.  Index ETFs allow your portfolio to capture the performance of the market minus the small fees you pay to the ETF provider.

This is a great way to invest if you don’t want to learn how to read annual reports, follow individual stocks, or worry about the stock market daily. 

ETFs can track an index like the American S&P 500 or Canadian S&P TSX/60, or they can track sectors like consumer staples, energy or technology, to name a few.  Two examples of technology sector ETFs are QQQ (which tracks the Nasdaq 100 index–the biggest technology companies in the US)  and XIT (which tracks the biggest technology companies in Canada like Shopify and Constellation Software). 

ETFs that track broad market indexes can help you achieve your financial goals given the proper long-term outlook.  

The rest of the article will focus on the market indexes that mostly track the movements of the biggest companies in the US, Canada and internationally, although some ETFs may have mid-cap and small-cap companies in them too.  

ETFs won’t make you rich quickly.  The best results take 20 years plus to allow for your money to compound and grow. 

You can get started with ETFs for the price of one share, and the diversification makes it a relatively safer investment choice than choosing individual stocks over the long term. 

ETFs have a few commonalities (and a few differences) with a mutual fund: they can hold multiple securities, including stocks and bonds, they can give you instant diversification and they can track an index – but neither an ETF of a mutual fund is required to track an index.   

ETFs take the emotion out of investing because investors are normally worried about the next crash or recession.  However, the stock market moves randomly and you never know when the best or worst days are going to occur.   

ETFs allow you to “buy and hold” and ignore the market noise. The media makes money playing off these fears, which is why you may think the stock market is like a casino.  The truth is, the longer you stay invested, the more money you should make.

ETFs: The Great Benefit of Diversification

With the purchase of an ETF that tracks an index, you lower your risk because you will own hundreds or thousands of stocks and/or bonds within the ETF. 

If you decided instead to only own two stocks in your portfolio and one of them fizzles out and goes bankrupt, you would see half of your portfolio disappear overnight.  If you own 1,000 stocks and one company in your portfolio goes to $0, you will barely notice it. 

An ETF that holds around 500 companies like VFV which tracks the S&P 500, gives you great diversification because most stocks make up 1% or less of the fund.  With that one VFV fund purchase, you own all the giants in the US market, such as Apple, Microsoft, Google and Amazon. 

ALways remember though that even if you lower your overall risk by investing in ETFs, you can still lose money. 

ETF Construction

Most ETFs are passive in nature and track an index like the S&P/ TSX 60 (largest Canadian stocks) or the S&P 500 (largest American stocks). 

The primary aim of an ETF that tracks an index is to equal the market index’s performance, less some small fees for the management and the administration of the fund. 

As a note, there are a lot of non-index ETFs which are actively managed.  As mentioned before, actively managed ETFs and non-index ETFs are not the focus of this article. 

The ETF Landscape in Canada

According to Investor Economics via the CETFA January 2022 Report there were 980 ETFs available in Canada with a combined $343 billion in assets under management.

In their January 2022 report, The Investment Funds Institute of Canada stated Canadians held $2.01 trillion in mutual fund assets.  Although ETFs are catching on, there is still a long way to go before the mutual fund industry starts to sweat. 

ETF Providers

The biggest ETF providers in Canada are Vanguard, BlackRock and BMO Asset Management.

Types of ETFs

Types of ETFs

ETFs can hold:

  • Stocks
  • Bonds
  • Currencies
  • Real estate investment trusts (REITs)
  • Cryptocurrencies
  • Commodities (gold, silver)

Here are some examples of index funds for each type of ETF.

Stocks: Can follow an index like the S&P TSX 60 (XIU) or S&P 500 (VFV).  

Bonds: Can follow an index like the FTSE Canada UniverseXM Bond Index (ZAG).  This fund is comprised of federal, province and corporate bonds.  

Sector/industry:  Follows a specific sector index like XIT (which tracks the Canadian technology sector) or ZQQ, which tracks the Nasdaq 100 index. 

International Assets: These ETFs do not have any underlying Canadian stocks in them, and they may (ex Canada) or may not (ex-North America) have any American stocks either.  Examples would be VIU, XEF or VEE. 

Commodities: These ETFs track gold (XGD), silver (HUZ) or oil (XEG) indexes.

Cryptocurrencies: There is no doubt the returns from Bitcoin over the past decade plus have been staggering, but you need to know that this is a highly speculative asset class that comes with significant risk.

All-in-One: You can opt for global all-in-one ETFs like XBAL or VBAL, which hold equities and fixed-income securities (bonds) from all around the globe.  These types of ETFs offer the most diversification. 

ETF Costs

Fund managers that follow indexes do very little buying and selling of securities compared to an actively managed fund.  As a result, the fees associated with an ETF are considerably lower than the fees for a typical mutual fund in Canada. 

Mutual funds are typically professionally managed, but the fund managers do a lot of buying and selling of securities in an attempt to beat the market.  Buying and selling constantly means increased commission fees which the fund managers pass off to the mutual fund clients. 

When you combine trading fees with the administrative costs the provider charges an investor you arrive at the management expense ratio (MER).  This number is listed as a percentage. 

ETF vs Mutual Funds Cost Comparison

The typical mutual fund in Canada carries an MER of about 1.75% while the typical index ETF has an MER of 0.25% (at the high end).  Paying an extra 1.50% in fees annually doesn’t sound like much when you pay 13% or 15% in sales taxes for shopping goods and services.

Except it is a huge deal.

This is especially true when you have sizeable sums invested into either a mutual fund or ETF.  In the table below, you can see that the typical ETF has MER fees of just $25 on a portfolio with $10,000 invested compared with the typical mutual fund cost of $175 per $10,000 invested. 

The bigger the portfolio value, the greater the absolute difference in cost.  At a portfolio size of $100,000, the typical ETF in Canada costs $1,500 less than the typical mutual fund per year. 

With a portfolio of $1,000,000, an ETF is $15,000 cheaper per year, which is astounding.  You only pay $2,500 in fees in total with an ETF versus paying $17,500 (or the price of a compact car) for a mutual fund.

 Cost Per Portfolio Level (ETF vs Mutual Fund)

Fund TypeMER$10,000$50,000$100,000$500,000$1,000,000
Mutual Fund1.75%$175$875$1,750$8,750$17,500

You do not have to worry about writing a cheque or setting up an authorized payment plan for the ETF providers to claim their MER fees. They take their payments automatically without the need to bill you. 

XAW vs VXC Cost Comparison

As seen above, the difference in cost was huge between the typical ETF and the typical mutual fund in Canada. 

What happens when we look at the costs between two popular yet similar ETFs that follow international and US equity indexes?   

The management expense ratio for XAW, which is a popular index fund that holds almost 9,200 stocks of companies outside of Canada, is 0.22%.  This is a BlackRock ETF offering.  The other big ETF player in Canada is Vanguard, the company that invented the original index fund.  Their alternative to XAW is VXC, and the MER for that ETF is 0.21%. 

There are many factors to consider when evaluating two ETFs, but don’t get totally caught up on the MER, even though it is important to keep costs low. 

The difference between the two funds is 0.01%.  There is nothing to write home about here. Even on a $1,000,000 account, the difference in cost is only $100. 

If there was a hypothetical ex-Canada index ETF that had an MER of 0.30% it still would not make much of a difference.  With a portfolio valued at $100,000, the difference would be $90 between VXC and the hypothetical “high MER” ETF. 

On a $1,000,000 portfolio, there is a sizeable $900 difference, but if you have $1,000,000 you likely will not be too concerned with an extra $900 in fees.  Each year, with an average of 6% returns, you would earn $60,000 on your portfolio.  That leaves you with $59,100 after fees.  Not too shabby.

Here are the costs for XAW, VXC and the hypothetical higher fee ETF for portfolio values ranging between $10,000 and $1,000,000.

Fund TypeMER$10,000$50,000$100,000$500,000$1,000,000
Hypothetical ETF0.30%$30$150$300$1,500$3,000

The real cost savings comes with a switch from mutual funds over to ETFs.  Once you are in the index ETF world, there are usually very similar and popular index ETFs that have MERs very close to each other.  So if you are trying to choose between a few index ETFs, the determining factor likely will not be cost.   

All-in-One ETFs

“All-in-One” ETFs allow you to invest in all regions across the globe, spanning all sectors with a portfolio filled with stocks and bonds.

These funds contain multiple underlying ETFs in one ETF “wrapper.”

You only need to buy one fund, like VBAL or XBAL based on your risk tolerance and finance goals.   Some of the all-in-one funds are more conservative than others.  You can find all-in-one funds with only 20% equities exposure, all the way up to 100% equity exposure. 

These types of funds automatically rebalance their allocations so you do not have to do anything manually.  This is the definition of passive investing.  Talk about simple.  With one purchase, you get worldwide diversification for a low cost with all the biggest companies in the world included in your portfolio.

This is a “set it and forget it” type of investment that you don’t have to keep looking at constantly.  Over the long run, big businesses make money and share those profits with shareholders.  You can hold thousands of different companies, including the biggest in the world like Royal Bank, Amazon, Apple, Microsoft, Facebook, Google and Samsung.

Designing Your Own ETF Portfolio

Only a short time ago, Canadians did not have the option to invest in the “all-in-one” funds like VBAL, VEQT, XBAL or XEQT.

You had to create your own “all-in-one” consisting of four types of ETFs:

  • A Canadian equity ETF
  • An American equity ETF
  • An International equity ETF
  • A Canadian and/or global bond ETF 

The portfolio above gives you a diversified allocation of assets that cover equities and bonds from around the world.  Diversification helps to soften the hit to your portfolio when the market corrects or crashes. 

Even though the easier “all-in-one” fund exists, you may want to still create your own “all-in-one” fund, although it would really be an “all-in-four” fund in this case. 

This would give you a little more control over the regional weights in your portfolio.  With this method, you can focus on changing your asset allocation. 

If you chose an “all-in-one” global balanced ETF such as VBAL you might not like that the US equity market makes up only 25.95% of the fund (as of the month-end January 2022).

In your portfolio, you may decide you want 35% US equity market exposure.  In this case, you would have to create your own “all-in-four” ETF portfolio. 

You can check some hypothetical scenarios below.

Scenario 1: Four ETFs – Equal Allocation Strategy

Based on your risk tolerance, you would need to set some allocation targets for your portfolio.  If you had a higher risk tolerance than most, you could hold the four different types of ETFs and set a 25% target allocation weight for each of them.  Under this scenario, 75% of your portfolio would be held in equities.

If you invest $10,000, then you can add $2,500 to each type of ETF.  Your initial purchase would be:

  • A Canadian equity ETF for $2,500
  • An American equity ETF for $2,500
  • An international equity ETF for $2,500
  • A bond ETF for $2,500 

You would split everything evenly into the four categories. 

Over the course of the year, one ETF would likely outperform the rest and pull your desired allocations away from your 25% targets above.  This would require a manual rebalance of your portfolio at the beginning of the next year.  This is a potential disadvantage of creating your own ETF portfolio. You need to get a little more involved. 

Rebalances are always based on the market value of your ETFs, not the book (purchase) value. 

The market value of any ETF = current market price * the number of shares or units you hold

If at the beginning of the year your Canadian Equity ETF had a market price of $25, you would have bought 100 shares.  Your cost would have been $2,500 and at that moment of purchase, your market value would have been $2,500.

At the end of the year, suppose the Canadian markets had a banner year, and the ETF increased in price by $5 per share.

Now your Canadian ETF market value would be = current market price * the number of shares

                                                                     = $30 * 100 = $3,000        

Continuing on, assume that the American markets did really well in the first year and also gained $5 per share.  Both your Canadian and US ETFs were worth $3,000 each.  Suppose your international ETF went down by $5 per share and is now worth $2,000.  Your bond ETF stayed the same at $25 per share and is still worth $2,500.

Looking below, the Canadian and US ETFs now make up 28.6% of your portfolio, while the International ETF has fallen to only 19% of the portfolio value.  

After One YearMarket Value ($)Pct (%)
Canadian ETF3,00028.6
US ETF3,00028.6
International ETF2,00019.0
Bond ETF2,50023.8

At this point, you need to rebalance your portfolio to bring every ETF back to 25%.  You can either contribute a lot of new money to the international and bond indexes or sell some of your Canadian and US equity ETFs and buy back into your international and bond indexes.  This is a strategy called “buying low and selling high”.

Using this method, you would need to rebalance all four ETFs.  Although this method will bring you cheaper MERs, it wouldn’t be ideal for most new investors because you would have to calculate manually (or use Excel) to rebalance the funds back into the right allocation percentage each year. 

Scenario 2: Four ETFs–Overweight on US Equities

Suppose you want to start a portfolio with 35% exposure to US equities in a $10,000 portfolio.  Instead of putting $2,500 into all four categories, as you did in scenario 1, you would put $3,500 in an ETF that tracks the US market.   To offset that increase, you would split the remaining 65% ($6,500) into the other three (Canadian, International and bond) ETF categories. 

Here is one potential portfolio breakdown:

  • Canadian equity ETF = 22%
  • US equity ETF = 35
  • International equity ETF = 22%
  • Bond ETF = 21%

In theory, you can pick any percentage for any of the different regions and start your ETF any way you want.  Nothing is stopping you from going up to 50% in US equities, but remember that no one knows what will happen in the stock market next week, next year, over the next decade, etc.  It is safer, especially when you are just starting out to stay closer to an equally weighted portfolio. 

A commonly constructed ETF could hold: VXC (Canadian equity), VFV (US equity ETF), VIU (International -ex-North American equity ETF) and ZAG (Canadian bond ETF).  You can choose to mix and match and even throw in an ETF like XEF for more exposure to emerging markets as well. 

Keep it simple.

Having to maintain four funds may not involve much work, but “all-in-one” ETFs are much easy to follow and maintain.  The drawback with an all-in-one ETF is you have no control over your regional allocations.   

How Can You Invest in ETFs?

There are three ways you can invest in ETFs, through a(n):

  • Online brokerage where you can self-direct invest
  • Robo-Advisor
  • Financial/investment advisor
  1. Online brokerage (Self-directed investing): If you choose to become a self-directed investor, you alone make your investment decisions.  You can open up an online brokerage and start investing. 

    You can customize your portfolio however you want, with whichever ETFs or other asset classes like stocks or currencies that you want.  It is you who is in charge of rebalancing.  Since you don’t have access to financial advice, you should know how to research, buy and sell ETFs.
  2. Robo-Advisor: If you want someone else to manage your money with reasonable fees, a robo-advisor may be right for you.  A robo-advisor is an internet-based wealth management firm that invests in low-cost ETFs for you.  You do not have to do the actual investing. 

    To be clear, there isn’t a robot that is doing your investing either. There are humans available for you to talk to.

    You can build a portfolio of cheap ETFs, and the Robo algorithms will always rebalance your portfolio back to the desired allocation weights.  Robo-advisors can give you advice based on your risk profile and they can help you collect and DRIP (re-invest) your dividends. 

    In exchange for those services, these products have a slightly higher cost.  This places a robo-advisor’s fee somewhere in the middle between index ETFs and the mutual fund fees charged by the banks or investment firms. 

    Wealthsimple Invest offers low MERs of approximately 0.40% to 0.50%.

    Based on your risk profile Wealthsimple will select ETFs for you based on your financial goals.  These portfolios hold a mix of different asset classes, such as government bonds, gold and stocks from all around the world.

    You can set these accounts up so that there are automatic contributions made, and the fund rebalances itself too. 
  3. Financial / Investment Advisor: There is a lot of chatter in the personal finance community that says traditional financial or investment advisors are not worth it.  In most cases, that is true.  For younger investors who are starting out, there isn’t a good reason to go this route.

    However, financial and investment advisors have a place at the table depending on your situation. This is the most expensive out of the three options, but it could provide real value for you. 

    If you are terrified about investing on your own, then you could go this route.  Hopefully, after reading some blog articles you can gain the confidence to self-invest. 

    Look for a fee-only financial planner if you have enough money to do so.  This option may be a good option if you have a complicated financial situation, you own a business, or you are receiving estate planning guidance.  This guidance can create value that will more than offset the elevated costs. 

    If you pay $3,000 per year in fees to a financial planner but you figure out how to save $30,000 in future estate taxes when you transfer assets to your children, it may be valuable.

    Be careful, though, not all advisors are the same.  If you go to a big bank, then the “advisors” are told to push the bank’s products.  They may not even have that more knowledge than you do about the stock market.  This is not ideal for you. 

    You may want to open a brokerage account at the same place you bank, but realize that as your investment portfolio grows you will pay more and more fees for this privilege. 

How to Buy ETFs if Self-Investing

It is really easy these days to buy ETFs as they trade on the major stock exchanges.  You can open an online brokerage (investment) account at any of the major banks or use an online discount brokerage like Questrade or Wealthsimple.  An online brokerage is a place online where you can sign up and then buy/sell stocks, bonds, ETFs, GICs, etc.

After signing up, you have to transfer funds into your online brokerage account.   The process is simple with a brokerage like Questrade and can be accomplished with a simple transfer of funds or by setting up a bill payment.  You can choose to send a lump sum amount or you can set up automatic transfers as often as you like. 

Where to Buy ETFs

You can purchase ETFs at any bank brokerage, but the best places to buy ETFs for free are Questrade, National Bank or Wealthsimple. Out of all the brokerages in Canada, Questrade and Wealthsimple are the two online brokerages that allow you to purchase ETFs for free.  National Bank has just joined the party as the first no commission fee trading big bank. 

Questrade: Clients of Questrade enjoy free ETF purchases and commission fees from anywhere from $4.95 to $9.95 when you buy or sell stocks.

They offer all the registered account types like TFSA, RESP, RRSP, RRIF, LIF, cash, and margin accounts.  You need $1,000 minimum in order to open up each account type. 

Wealthsimple: WealthSimple is Canada’s online brokerage that offers commission-free stock or ETF trades.  A significant aspect of investing with Wealthsimple is that you don’t have to meet any specific minimum account balance requirement. 

However, you have to pay the brokerage’s conversion rate if you want to purchase individual stocks on any American stock market exchange.

Deciding Which ETFs to Purchase

How do you choose the right ETF for you?  

Well, it depends on a lot of factors like your age, investment goals, personal financial situation, risk tolerance and asset allocation choices.

Your ETF choices also depend on the ETF’s costs, underlying holdings, fund performance and provider.     

  1. Age: If you have a long time prior to retirement, you could opt for more risk and pick ETFs that maximize growth and hold 100% equity-based ETFs. 

    As you get closer to retirement, you may opt for fixed-income ETFs to protect more of your capital in the event of a correction or crash.  That may mean you pick a balanced or even conservative “all-in-one” ETF.
  2. Investment and financial goals: Your choice of ETFs also depends on your financial goals

    If you want to retire by the time you are 35, then you are going to need to have a very aggressive portfolio.  You may opt to choose to hold 80% or more of your portfolio in growth ETFs.  Or you could ride the wave of a hot sector ETF like ZQQ or XQQ which tracks the Nasdaq 100. 

    If you want to live off dividends eventually, you may choose to invest in dividend growth ETFs like DRGO or VYM that are listed on the US stock exchanges.   Or focus on high-yield dividend paying ETFs in Canada, like VDI or XEI. 

    If you want to transfer your wealth to your children and are worried about taxes, you could switch over to an all-equity ETF that will shelter taxes on capital gains for decades. 
  3. Personal finance situation: Throughout your life, you may want to switch the type of ETFs you have based on your life situation. 

    If you have a high-income household and are good savers, you can afford to go heavier into equity-based investments because the money invested isn’t needed for daily expenses.

    If you have a pension, then you can continue to hold aggressive all-equity ETFs into retirement if you don’t need to rely on any of the money for living expenses. 
  4. Risk tolerance: If you have a high or aggressive risk tolerance, it means that you can handle large upward and downward market swings without losing your cool and selling your investments. 

    In that case, you may choose to hold more equities.  Equities offer the chance for a higher reward in exchange for the elevated risk you need to take.    

    If you are conservative in nature, you would want more fixed income (bond ETFs, guaranteed investment certificates -GICs etc.) in your overall portfolio.  A conservative portfolio offers a low return rate, but with a lower risk factor. 
  5. Asset allocation:  Your asset allocation weightings are influenced by your overall financial goals and risk tolerance.  Here is a list of common asset classes to include in your asset allocation:

    a. Equities
    b. Bonds
    c. Cash
    d. Real Estate

    There are more asset classes than this, but as a new investor, you should focus on the above.    The asset classes you choose to hold in your portfolio affect your ETF choices.  If you want to hold 100% of your portfolio in stocks because your retirement is decades away, then you could choose an all-in-one full equity ETF like XEQT or VEQT. 

    If you want to hold a moderate portfolio with some stocks and some bonds in a 60/40 split, you could opt to hold a balanced “all-in-one” fund such as VBAL. 
  6. Costs: There are costs involved with establishing and running an ETF, including paying the management team.   These are known as MER fees.  Most of the popular index ETFs in Canada have MER fees between 0.06% to 0.25% which are ultra-low compared to the average Canadian mutual fund fee of 1.50% to 2.00%. 

    One factor you can controlare the fees you pay.   By paying fewer fees, you have more money to invest.  When the MERs are so low, the difference in fees is not a huge concern if your portfolio is under $100,000. 

    The larger your portfolio, the bigger the cost difference can be between ETFs.

    A fee of 0.06% on a $100,000 portfolio translates to a cost of $60, and with a fee of 0.25% on $100,000, the cost is $250.  That is a $190 difference per year.  

    A fee of 0.06% on a $300,000 ETF portfolio is $180 annually, a fee of 0.25% on that same amount is $750. That is a difference of $570.
  7. Underlying holdings: Most ETFs hold either bonds or equities.  If you want the most diversification possible, then an “all-in-one” global ETF that holds thousands of equities and/ or bonds from all regions of the world is ideal. 

    A Canadian index ETF, however, may only follow 60 – 200 companies in mostly two or three sectors (financial, energy, material sectors).  However, you may feel that offers you adequate diversification.

    If you stick with index ETFs, you will hold the largest companies in Canada or the US in your portfolio.  For instance, Blackrock’s XUU ETF holds all your favourite American companies, like Amazon, Apple, Microsoft, Google and Facebook. 

    You can always see the top 10 holdings of an ETF, and the sector breakdown by percentage on the fund page or by looking at the ETF Fact Sheets. 

    Diversification does a lot to lower the risk of your portfolio overall.
  8. Average annual return/ Performance of Fund: This is a little tricky because all the popular index ETFs in Canada debuted at the beginning or middle of the current stock market bull run, which began in 2009.  You can still compare funds that began around the same time and that follow the same index to see how they performed relative to each other.

    In investing, past returns cannot be used to predict future returns, and you need to understand that.

    It is advisable to check out the largest funds by assets under management and also compare their last 1, 3, 5 and 10-year returns.  That way, you will get a sense of how well the fund has performed.  If there is a bear market for a year or two, then all ETFs that track the same index should perform similarly.  Likewise, if there has been a bull market, then 8-10% annual returns are possible for all ETFs that follow the same index.     
  9. ETF Providers: There are approximately 1,000 ETFs in Canada available for purchase, which means there is a lot of variety.   There are also a lot of newer ETF providers. 

    Be sure to stick with the largest providers, such as BlackRock Canada, Vanguard Canada and BMO Asset Management.   To see which providers are the biggest ETF players in the game, check the assets under management (AUM). 

    You want widely held ETFs because you want to take advantage of high trading volumes in case you need to buy or sell stocks at a moment’s notice. 

    If you purchase a newly formed ETF, then there will be a very limited opportunity to sell shares when you need to because there aren’t enough investors trading it.    

Pros to Purchasing ETFs

ETFs have a lot of advantages and a few disadvantages. Here are a few of the pros and cons of ETFs. 

Here are the advantages of ETF investing. 

  1. Diversification: An ETF that tracks an index lets you hold tens, hundreds or even thousands of stocks or bonds.  Your money is spread into a lot of different buckets and bets on all the horses racing instead of just a few.  With one purchase, you can maximize your global equity and fixed income exposure.

    Purchasing a few stocks that comprise your entire portfolio is riskier than buying an index ETF that tracks a major stock market. 
  2.  Liquidity: ETFs trade on the stock markets where you can buy or sell them just like a stock on weekdays from 9:30 am – 4 pm Eastern Standard Time.
  3. Lower Fees:  The fees for the popular index ETFs range from 0.06 to 0.25% while the average mutual fund fee in Canada sits at 1.5 to 2.0%. 
  4. Transparent: ETF data gets published daily, and some information is published monthly.  ETF data is also highly visible so you can follow along with what the fund’s holdings are, how much they have given in terms of distribution, etc.  Mutual fund data is not as easily accessible. 
  5. Passive: If you own an ETF tracking an index, you just have to hold it through the inevitable ups and downs over the years.  Doing nothing can lead you to wealth. 

    Owning an index ETF in Canada and US has proven to be profitable over long periods of time.

    That is not to say that there may be years where you see your ETF portfolio value drop, but ETFs that track a well-known index tend to bounce back, eventually. The same cannot be said for individual stocks.
  6. You can DRIP: You can set up your ETFs to reinvest your dividends (distributions) automatically into more shares of the ETF you hold so you can compound your investments faster. All the while paying nothing in commission fees. 
  7. Lower Taxes: In non-registered or taxable accounts, ETFs can be considered tax-efficient because they are passive by nature, with very little in the way of buying and selling.   Mutual funds are more likely to sell underlying stocks and trigger capital gains taxes. 
  8. Invest in asset classes that are hard to invest in individually: You can purchase a bond index, which is great because investing in individual bond issues isn’t always straightforward. You can also invest in an ETF that tracks the price of Bitcoin to gain some exposure to that asset class.  Owning actual Bitcoin involves a lot of steps. 

    You can also invest in a real estate investment trust (REIT) that invests in commercial, residential, industrial or office spaces.  This requires far less capital than if you were buying physical real estate properties. 

Cons to ETF Purchases

Not everything is rosy when it comes to ETFs.  Here are the disadvantages to ETF investing.

  1. Transaction fees: If you do not use discount brokerages like Wealthsimple and Questrade where ETFs can be purchased for free, then you may rack up a lot of money in fees if you are dollar-cost averaging by purchasing smaller ETF amounts each month.  
  2. Lack of customization: When you purchase an ETF, you have to hold everything that the ETF holds even if you don’t like it.   For instance, you may find that a Canadian index ETF like XIU holds 35% of its fund in financial companies within Canada.   

In another ETF, you may not like four companies in the top 10 holdings.  With an ETF, you have to take what the ETF offers. You cannot change the details to your liking. 

ETF Guide Conclusion

The Canadian ETF market offers investors an array of options.  ETFs help you build a very affordable and diversified portfolio easily without having to be an expert investor.  You can beat the majority of active managers by investing in broad market index ETFs that follow indices like the S&P TSX 60 and S&P 500 if you have decades to invest.

What is your favourite ETF?  Why did you start investing in ETFs?  Let us know in the comments below.

ETF Guide FAQs

How long should you hold ETFs?

How long you hold your ETFs for depends on your risk tolerance and your financial goals.  If you’re saving for retirement and you’re in your thirties you should hold them for multiple decades.  If you’re a day trader, you may only want to hold your ETF for a few hours to make a quick profit. Don’t invest money that you need in the short term because a market crash can wipe out that much needed money in a matter of months.

Are ETFs good for beginners?

ETFs that follow major indices like the S&P TSX60 and S&P 500 are excellent choices for beginners because they provide instant diversification, they allow for a simple, passive investment strategy and decent long-term market returns.  All for an extremely low fee. You don’t even need a finance degree.  

How do I pick an ETF?

You need to consider your age, financial goals, personal financial situation, risk tolerance and asset allocation first of all.  You need an investment plan first before picking your ETFs.  Once that has been established and you’re comparing individual ETFs, focus on the ETF costs (MER), underlying holdings, past performance and also the ETF provider.

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